63. Memorandum From Secretary of the Treasury Dillon to President Kennedy0
SUBJECT
- October Developments in the Balance of Payments Deficit1
On the basis of very early indications, our over-all payments deficit increased very substantially in October, by about $900 million, of which $56 million represented gold losses.
This very large deficit, without seasonal adjustment, is in sharp contrast to the third quarter deficit of about $725 million, and to the deficit for the first nine months of the year of $1.5 billion, without any seasonal adjustment. Debt prepayments in the first nine months were about $550 million, with most of this in the third quarter.
These unusually large figures in October are believed to be due primarily to transactions with Canada which may have accounted for as much as $600 million of the October deficit. The figures reflect special fiscal year-end window dressing operations by the Canadian banks of which about $180 million returned to the U.S. during the first week of November.
[Page 155]It has been estimated that the Canadians lost about $600 million to the United States in the first half of the year. About $400 million of this was reversed in the third quarter. It is likely that the bulk if not all of the remainder of the earlier loss was reversed during October.
The Canadian government also borrowed $125 million during the month from U.S. insurance companies on a long term basis and apparently attracted some short-term capital from the U.S. for investment purposes.
As a result of this strengthened position, Canada yesterday reduced her Bank rate from 5% to 4%. It had been raised as high as 6% at the time of the currency crisis last June. This action should be helpful in reducing the incentive for short-term flows to Canada.
Other major transactions in October, outside of Canada, included the following: an increase of about $100 million in the official reserves of France and Italy, payments of $75 to $100 million to Venezuela for taxes and royalties by U.S. oil companies, a cash subscription of $30 million from the U.S. Government to the Inter-American Development Bank, sales of about $20 million in Australian bonds to American purchasers, and approximately $30 million movement of short term funds to the United Kingdom in the last few days of October.
Estimates of the basic deficit for the third quarter will not become available for several weeks. During the first half of the year, the basic deficit was less than $300 million, seasonally adjusted.
From January 1 through November 7, we now estimate the over-all deficit, without seasonal adjustment, at about $2.1 billion. Last year it was $2.5 billion for the full year. During the remainder of the year we should receive a payment of almost $125 million on the British loan. We expect the deficit to be reduced another $75 million by special borrowing operations with Switzerland and Italy. On the unfavorable side, there may be window dressing operations by the European banks at the end of December which may result in some temporary capital outflow of an extremely short-term character.
These figures indicate the importance of our receiving before the end of the year the German payments of $225 million due us for military equipment under the terms of the Strauss-Gilpatric agreement,2 if the deficit for the full year is to show an improvement over the figure for the previous year. As you know this payment is now doubtful because of the recent German defense budget cutbacks.
- Source: Kennedy Library, National Security Files, Subjects Series, Balance of Payments and Gold, 6/62-3/63. Limited Official Use.↩
- In a November 14 memorandum to Dillon, President Kennedy asked whether “the October loss of dollars indicates to you that we must take more drastic steps comparable to those that Canada took in the spring. Would the various steps that Canada took in the spring have an adverse effect on the economy. If not should we consider any of them.” The President added that in any event he would discuss this with Chancellor Adenauer that afternoon. (Kennedy Library, Dillon Papers, Memos to President) Regarding Canada’s efforts to improve its balance-of-payments position, see footnote 11, Document 33.↩
- Regarding this agreement, see Document 53.↩